Tax In History: CFCs and Tax Treaties: Historical Elements for the IIR Debate
This article revisits the OECD Commentary’s position on the compatibility of CFC rules and tax treaties from a historical perspective. It highlights that the key technical argument behind the compatibility endorsed by the Commentary rests on the anti-abuse character of the rule. This backdrop is of relevance for the analysis of rules that purport to have a similar mechanism but that lack the anti-abuse character – including worldwide income taxation rules and the Income Inclusion Rule (IIR) under Pillar 2. The article posits that these situations are beyond the scope of the technical argument and, therefore cannot rely on the OECD Commentary to support their compatibility with tax treaties.
Pedro Guilherme Lindenberg Schoueri, Ricardo André Galendi Júnior, Tax In History: CFCs and Tax Treaties: Historical Elements for the IIR Debate (2024), 52, Intertax, Issue 1 [pre-publication], pp. 1-11.
Directions for International Tax Policy, A Response to Hanna and Wilson
Christopher Hanna and Cody Wilson argue in U.S. International Tax Policy and Corporate America that an international tax reform proposal focusing on maintaining low financial accounting effective tax rates could win over proponents of full current rate taxation of foreign income as well as U.S. publicly traded corporate America. They propose combining full current rate taxation of foreign income with a reduced overall corporate tax rate of approximately 15%. This, they assert, could be roughly revenue neutral or raise revenue. In this paper, the authors explain why they disagree with this assertion and provide several justifications for their position. They argue that a reduction in the corporate tax rate would increase the problem of income and wealth inequality and exacerbate distortions of current law. Again, they submit that with the adoption of the corporate alternative minimum tax by the United States in 2022 and the anticipated adoption by many countries of Pillar 2 qualified domestic minimum taxes, full current taxation of foreign income under Hanna and Wilson’s proposal would raise little or no additional revenue.
Shay, Stephen E. and Fleming, J. Clifton and Peroni, Robert Joseph, Directions for International Tax Policy, A Response to Hanna and Wilson (November 6, 2023). 48 The Journal of Corporation Law Digital 8 (2023).
Corporate Tax System Complexity and Investment
Effective policymakers must balance the demands of formulating a corporate tax system that spurs economic activity while promoting a level playing field across firms. However, tax systems have become more complex over time, increasing firms’ difficulty in understanding and complying with tax regulations. The paper explores the role of corporate tax system complexity in both objectives, using an international sample and measuring tax system complexity based on the average time firms spend to comply with the country’s tax regulations. Examining both capital and labor investment, the paper documents two key findings. First, firm-level investment is less sensitive to changes in corporate income tax rates when tax system complexity is higher, suggesting that such complexity can undermine the ability of tax policy to stimulate investment. Second, the impact of complexity on the sensitivity of investment to the tax rate varies significantly across firms, with domestic-owned, smaller, and private firms being more negatively affected by tax system complexity.
Amberger, Harald Johannes and Gallemore, John and Wilde, Jaron H., Corporate Tax System Complexity and Investment (October 1, 2023). WU International Taxation Research Paper Series No. 2023-11.
Country-by-Country Disclosures and Firms' Internal Information Environment
This paper examines the relationship between country-by-country disclosures and multinational entities’ internal information environments. The paper argues that the introduction of US country-by-country reporting (CbCR) induces firms to change their information processing structures when the demanded information is not readily available, thereby increasing the need for effective information flows but simultaneously adding reporting complexity. The paper also finds that firms affected by CbCR have a significantly lower likelihood of having tax-related material weaknesses in internal controls than other firms. Consistent with less complex firms benefitting more from CbCR disclosure rules, the paper finds the results to be pronounced in firms with lower ex ante organizational complexity. Finally, the paper shows that firms with material weaknesses become less likely to address issues with a cross-border context in the 10-K filing when affected by CbCR.
International Tax Policy's Harm to Manufacturing and National Interests
Two tax regulations that permit US MNEs to use foreign contract manufacturers and to disregard their wholly owned foreign subsidiaries have created significant tax incentives for MNEs to move manufacturing outside the U.S. These tax incentives have contributed to the loss of 5 million manufacturing jobs and the closure of more than 91,000 plants since 1997. The US adoption of a corporate alternative minimum tax in 2022 and the current OECD initiative, Pillar Two, which would seek to impose a global corporate minimum tax may reduce the incentive to offshore in some instances. But the incentives created by the two tax regulations for US MNEs to offshore clearly remain and should be eliminated given the harms they have inflicted and are likely to inflict in the future. In this regard, this article proposes two amendments to the regulations to further reduce the tax incentives for offshoring. First, MNEs should not be allowed to use foreign contract manufacturers to qualify for the manufacturing exception in subpart F. Second, MNEs should not be permitted to disregard their wholly owned foreign entities. Under the Chevron doctrine, both proposals would clearly be valid.
'Just BEAT It' Do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?
This paper empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). The paper estimates a $6 billion aggregate reduction in US taxes for the sample firms in 2018. The paper also examines the consequences of reclassifying related-party payments and finds some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT.
Pillar 2: QDMTT or Safe Harbour Domestic Minimum Top-Up Tax (SHDMTT)?
The GloBE Model Rules have introduced the Qualified Domestic Minimum Top-Up Tax (QDMTT) into the ruleset of the international compromise on an effective minimum tax i.e. Pillar 2. Although countries do not need to implement a QDMTT as part of the internationally agreed common approach to Pillar 2, it is generally assumed that there are strong incentives for its adoption once a critical mass of countries have implemented GloBE. Possible alternative domestic minimum tax designs are hardly discussed because they are generally assumed to be inferior to a QDMTT. This paper first summarizes the benefits that adoption of a QDMTT offers to jurisdictions, as well as associated drawbacks and administrative challenges, especially for developing countries. The second part of the paper suggests that a Safe Harbour Domestic Minimum Top-Up Tax (SHDMTT) could be a viable alternative to the QDMTT. Like the latter, it safeguards the primacy of source countries to tax locally generated profits, and it allows jurisdictions to maintain their preferred mix of tax incentives, with only moderately higher losses in international competitiveness for limited categories of MNEs. But it is far easier to comply with and administer, and requires no peer review to take immediate effect.
Global Tax Evasion Report 2024
Over the last 10 years, governments have launched major initiatives to reduce international tax evasion. Yet despite the importance of these developments, little is known about the effects of these new policies. Is global tax evasion falling or rising? Are new issues emerging, and if so, what are they? This report addresses these questions thanks to an unprecedented international research collaboration building on the work of more than 100 researchers globally.
Profit Shifting Under the Arm’s Length Principle
This article analyzes the tax-induced profit shifting behavior of firms and the impact of governments' anti-shifting rules. It derives a model of a firm that combines internal sales and internal debt in a full profit shifting strategy and which is required to apply the arm's length principle and a general thin capitalization rule. It finds several cases where the firm may shift profits to low-tax countries while satisfying the usual arm's length conditions in all countries. Internal sales and internal debt may be regarded either as complementary or as substitute shifting channels, depending on how the implicit concealment costs vary after changes in all transactions. The paper shows that the cross-effect between the shifting channels facilitates profit shifting by means of accepted transfer prices and interest rates.
A New Scenario in International Tax Law: Two Proposals to Rethink the OECD Model in Response to the Generalization of Distance Work by Employees
This article analyzes the necessity to adapt the OECD Model Tax Convention (OECD Model) for remote work. It argues for the need for a legally binding agreement on two fundamental aspects: One, tax liability criteria for remote workers’ earnings and conditions relevant to determining when an employee’s remote work creates a PE for the employer. Second, the paper examines the current regulation of these issues in the OECD Model, identifies problem areas and proposes reforms.